HSBC urges investors to hold AI positions as Q3 earnings approach

HSBC advised clients in a Tuesday note that third-quarter earnings are positioned to act as the next upward catalyst for global equities, recommending that investors maintain exposure to the artificial intelligence trade rather than betting against it. Alastair Pinder, the bank's head of emerging market and global equity strategist, stated that earnings momentum, signs of AI monetization, and low valuations keep the bank's outlook constructive.

The S&P 500 has maintained its trajectory toward record highs despite a sell-off in the bond market. Pinder cautioned that this market resilience should not be interpreted as complacency, noting that the index's forward price-to-earnings ratio has declined by 16.5% since late 2025. Within that index, 27% of constituents have experienced multiple drops exceeding 20% this year. HSBC estimates that for every additional 50 basis point rise in the U.S. 10-year yield, the multiple would compress by a further 4.3%.

Volatility metrics also indicate underlying tension in the market. The average three-month implied volatility for S&P 500 constituents sits at the 85th percentile of its historical range, a level significantly higher than the VIX's 35th percentile. Since 2025, the index has generated an average return of 4% during reporting windows, contrasting with flat returns outside those periods. HSBC expects another season of earnings beats and guidance raises, citing improving guidance at its fastest pace since 2021 and $64 billion in customs refunds that should support margins.

Pinder noted that higher interest rates should have minimal impact on corporate earnings because approximately 80% of S&P 500 debt is long-term and fixed-rate. Regarding the AI sector specifically, the strategist pointed to accelerating inference demand and firm GPU rental prices as key indicators. HSBC favors hyperscalers as the clearest near-term beneficiaries of this compute demand.